Leveraging Technology to Combat Internal Retail Theft

by Terry Browning On Sep 1, 2003

Generally speaking, the retail term "shrink" refers to loss. This loss can take the form of merchandise, cash or virtually any other asset of the operation. Shrink is typically measured using periodic inventories and closely monitored as a key retail business barometer.
Shrink may result from a number of crimes including shoplifting and cashier theft. It may also result from mistakes such as missed price changes. Generally speaking, shrink falls into four categories across all retail segments, based upon the cause of the loss.

External. Shrink caused by external sources. This is the shrink category of which the retailer and the public are the most aware. Many people mistakenly equate external shrink with shoplifting only. However, external shrink can also come about through robberies and other causes.

Internal. Shrink caused as a result of illegal employee behavior. Internal shrink is caused by such acts as fraudulent cashier activity and theft of merchandise by employees. Internal shrink is the most serious category of shrink the retailer faces.

Administrative. Shrink that occurs either as a result of intentionally or unintentionally mismanaged administrative tasks, such as improperly managed price changes, improper disposition of damaged goods and mismanagement of inter-store transfers.

Vendor. Shrink incurred in the vendor delivery process. Causes of vendor shrink include often-deliberate errors made during the delivery process and improper handling of damaged goods credits.

These combined shrink categories cost U.S. retailers approximately $31.3 billion annually. The table below compares the four basic shrink categories in terms of percentage of contribution.
Historically, retailers have focused more of their loss prevention resources combating external shrink, primarily shoplifting, rather than internal shrink. However, according to retail and loss prevention studies, shrink caused by the retailer's own employees is almost always at least as detrimental as shoplifting. No other shrink category contributes more to the overall loss problem across all retail segments. Internal shrink cost U.S. retailers more than $15 billion in 2001.

Deconstructing Internal Shrink
Internal shrink occurs on all levels and in a variety of ways. The most prevalent perpetrators are employees who steal alone. However, many employees steal in collusion with friends or family, and some employees work together to steal from their employer. The schemes used by the dishonest employee are quite varied and run the gamut from the most basic to quite elaborate.
Cashier dishonesty at the point of sale is consistently the largest component of the internal problem. Dishonest cashiers employ a multitude of theft methods, and they vary depending on retail segment, POS system, and the retailer's specific policies and safeguards. Here's a summary of just a few of the most prevalent methods of cashier theft.
Ã¢â‚¬Ë˜ Fraudulent refund activity
Ã¢â‚¬Ë˜ Fraudulent use of the void key
Ã¢â‚¬Ë˜ Fraudulent use of point-of-sale training mode
Ã¢â‚¬Ë˜ Fraudulent credit card activity
Ã¢â‚¬Ë˜ Fraudulent suspension of transaction
Ã¢â‚¬Ë˜ Numerous customer short-changing schemes
Ã¢â‚¬Ë˜ Sliding merchandise completely around scanner
Ã¢â‚¬Ë˜ Switching bar codes on merchandise

Fraudulent cashier behavior typically accounts for as much as 65 percent of total internal shrink. Cashier point-of-sale activity must become a closely monitored area if the business hopes to reduce overall shrink.

With such a large percentage of the internal shrink problem occurring at the point of sale, it's important to have a basic understanding of how the shrink is occurring. There is almost always a direct relationship between the amount of empowerment the cashier has at the point of sale and the level of real security the business enjoys.

By "empowerment" I mean the cashier's ability to handle transactions of all kinds without management's approval or intervention. Some may jump to the conclusion that the solution must then be to lock things down tightly at the point of sale and require management approval for every little thing that can possibly come up. The down side to this approach is, of course, that customer service and customer throughput would suffer greatly, which also impacts the business. The key is to find the right balance between adequate customer service and adequate cashier security.

Employee management. According to the 2002 National Retail Security Survey, one of the key components to minimizing shrink in general lies in achieving a low level of employee turnover (20 percent or less per year). Retailers use a variety of pre-employment screening methods in an attempt to hire the best employees available. Some of the more widely used screening methods include
Ã¢â‚¬Ë˜ employment verification,
Ã¢â‚¬Ë˜ criminal background checks,
Ã¢â‚¬Ë˜ verification of references,
Ã¢â‚¬Ë˜ drug testing, and
Ã¢â‚¬Ë˜ testing designed to measure and predict overall honesty.

Technical loss prevention applications. New technologies and applications have emerged that require the loss prevention and IT departments to work together to implement them. Below is a summary of loss prevention approaches that usually require some level of support from retailers' IT groups.
Ã¢â‚¬Ë˜ Advanced CCTV applications (remote digital storage, remote video network)
Ã¢â‚¬Ë˜ POS exception monitoring applications
Åž POS data-mining applications
Ã¢â‚¬Ë˜ Case management applications
Ã¢â‚¬Ë˜ POS/CCTV integration
Ã¢â‚¬Ë˜ Access control

Some of these newer applications work because they combine two different technologies. A good example of this is data mining applications, which have historically handled only data, that have recently developed capabilities to interface with store-level digital video systems. By doing so, they not only add value to their own applications, they leverage the retailer's IT infrastructure and deliver more value by integrating with existing digital video systems.

The decreasing costs of store-level and remote data storage have allowed retailers to store larger blocks of POS data and digital video, increasing their abilities to leverage technologies like those mentioned above. And with higher-speed networks becoming more common in retail, the user can now very often gain access to these systems remotely as well as at store level. Remote access to combined data mining/digital video applications allows for remote incident inquiries, which can result in more effective incident review and yield significant hard savings in travel for the loss prevention manager.

There are still more technologies emerging over the horizon to fight retail shrink, such as RFID coupled with GPS, supply chain management solutions, and even biometrics. Already used in certain non-retail applications, facial recognition; hand readers and retinal scanning may soon find their way into retail applications. If you find that hard to believe, consider that there are already several time-and-attendance systems on the market that use biometrics in order for the employee to clock in and out.

Challenges
Growth and change brings with it at least a few challenges. One of the biggest challenges for many retailers is having an adequate IT infrastructure to implement some of today's newer, network-based applications. Though higher-speed networks are becoming more common in retail, they aren't yet prevalent. There are many retailers that still operate with low bandwidth. The issue here primarily is cost, but there can be other factors as well.

Sometimes even if the higher-speed network is in place with the needed bandwidth, the retailer's IT department may have reservations about allowing it to be used for these types of applications. Digital video consumes much more bandwidth as it's moved over the network than do the types of data IT is often used to managing. However, in most cases there are ways to govern the bandwidth usage and thereby alleviate the concerns of IT.

Unfortunately, as long as there are employees in the store, some percentage of them will steal from the employer. In order to succeed, the retailer must strive to find the most effective methods to manage the problem. New technologies will drive exciting new applications with more effective ways to address internal theft. Applications that find better ways to search, retrieve, and present security-related data with video will clearly continue to develop and emerge and be used by more and more retailers in the future.

Terry Browning is senior manager of the IntelleView Solutions Team at American Dynamics.